Editorials

We encourage our readers to submit relevant articles of interest to be published on this web site. Students, members, and companies are invited to take advantage of this opportunity! Please send your editorial to: Dick Forrest, CPIM dforrest@charter.net

Ira Smolowitz, Ph.D. Professor of Finance and Dean, Bureau of Business Research and Program Development at the American International College, Springfield, MA.

Some of Ira's past articles of interest:

• A View of Education From Both Sides: An Assessment of the American Education System
• Ramifications of the 24/7 Economy
• Work-place Gossip: A Reassessment
• The Disappearance of Courtesy in America: Implications for Business
• The Outlook for American Competitiveness
• Consumer Marketing: A Flawed Strategy
• A Healthy Workforce: The Driver of Corporate Financial Performance
• The Use and Misuse of Forecasts
• Decline in Ethics: Decline in National Competitiveness
• Promoting Prudent Corporate Growth
• The Dynamic of Successful Marketing
• The Monty Hall Paradox: Lessons for Management
• Improving American Competitiveness
• Get to the Root Cause of Factory Failure: Ask the Five Ways
• The Halo Effect: Proceed with Caution
• Improving American Competitiveness
• The Conflict Between Symbolism and Substance
• Virtual Teams: Identifying The Benefits and Problems
• Assessing Potential Management Talent
• Identifying and Avoiding a Common Decision Trap
• Circuit City: A Flawed Cost-Saving Idea

Circuit City: A Flawed Cost-Saving Idea

By Ira Smolowitz, Ph.D.

In my opinion, successfully selling consumer electronics is a particularly challenging task. The sales person must be prepared to answer the customer’s numerous technical questions about: (a) the features of a particular product; (b) the compatibility of a product with the current equipment owned by the customer; and (c) comparing product A vs. B on a benefit/cost basis.

Given the demands imposed on the sales staff, a highly trained, highly motivated sales staff is of critical importance.

In my opinion, a recent announcement by Circuit City will serve to negate the above requisite sales staff conditions:

Background:

New York – A new plan for layoffs at Circuit City is openly targeting better-paid workers, risking a public backlash by implying that its wages are as subject to discounts as its flat-screen TVs.

The electronics retailer, facing larger competitors and falling sales, said Wednesday that it would lay off about 3,400 store workers – immediately – and replace them with lower-paid new hires as soon as possible.

The laid-off workers, about 8 percent of the company’s total work force, would get a severance package and a chance to reapply for their former jobs, at lower pay, after a 10-week delay, the company said.

Analysts and economists said the move is an uncertain experiment that could backfire for the chain. The risks: Morale could sink and customers could avoid the stores. Also, knowledgeable customer service is one of the few ways Circuit City can tackle competitors that include Wal-Mart Stores Inc., they say.

“This strategy strikes me as being quite cold,” said Bernard Baumohl, executive director of The Economic Outlook Group. “I don’t think it’s in the best interest of Circuit City as a whole.”

While other companies, such as Caterpillar Inc. have introduced two-tiered wage systems, where newer workers make less, firing workers and offering to rehire them at a lower wage is very rare.

“I don’t think it’s fair,” said Hamilton Smith, an 88-year-old retired federal worker who had just purchased some batteries at Circuit City. “You need to give people a living, working wage.” He said he would think twice before shopping at the company’s stores again.

Circuit City’s cuts come at a time when other retailers are trying to put more knowledgeable workers on store floors. Home Depot Inc., whose new chief executive is struggling to re-ignite sales growth at its stores, said it has raised pay to attract skilled tradespeople, such as carpenters and electricians¹

I fully agree with the observations of David Lewis, President of Operations Inc., a human resources consultancy. He believes Circuit City’s move ultimately will weaken the organization. “It will give them short-term gains, but for the long term it’s like shooting yourself in both feet with a howitzer,” he notes.²

In my opinion, Circuit City’s cost reduction strategy is counter-productive in the long run. The dismissed workers earned their current salaries and secured these salaries with management’s approval. What was formerly a positive morale builder now has become an employee’s individual liability. Circuit City’s dismissed workers represent an investment in corporate training that is now walking out the door.

Communication channels will be interrupted, and the surviving workers will be demoralized. Customers, too, may be alienated.

I view the strategy as “putting out a fire with gasoline.” The fire will appear to be extinguished but will flare-up later.

References

1. “Circuit City to cut more than 3,500 store and IT jobs, cut wages” – Associated Press – March 28, 2007 – downloaded 3/30/07 from http://business.bostonherald.com/businessnews, p.1

2. Tahmincioglu, Eve, “Circuit City plan: Bold strategy or black eye?” MSNBC – March 29, 2007 – downloaded 3/30/07 from http://www.msnbc.msn.com/id/17857697/p.3.

---

Articles printed with the permission of Dr. Ira Smolowitz, Professor of Finance and Dean, Bureau of Business Research and Program Development at American International College, Springfield, MA.